Fresh & Easy nears a critical juncture

Fresh & Easy, the 175-store chain of neighborhood markets in California, Nevada and Arizona, is rapidly approaching a turning point in its history.

The product of global retail powerhouse Tesco PLC’s initial foray in the United States, Fresh & Easy has yet to hit its stride and live up to the considerable hype that surrounded its debut four years ago.

Intended to fill a perceived gap in the American market, Fresh & Easy aims to make fresh, wholesome food and other grocery products affordable and readily accessible. The stores are attractive and have, according to Tesco executives, earned a high degree of loyalty among the consumers who shop them.

"We are encouraged by the momentum in the Fresh & Easy business," said Philip Clarke, who succeeded Terry Leahy as Tesco’s chief executive in March, in a recent statement about the company’s first quarter results. "Sales were up 21.9% (31.7% at constant exchange rates), with further good, double-digit like-for-like sales growth of 11.1% driven by both increased customer numbers and higher average spend. Our new stores in Northern California have started strongly."

The problem is that Fresh & Easy has never turned a profit. The chain lost £186 million during the fiscal year ended February 26. Total red ink for Fresh & Easy amounts to some £555 million. How long Tesco will accept those kinds of results remains to be seen.

Upon becoming CEO, Clarke was quick to set benchmarks for the performance of Fresh & Easy (and all the other parts of Tesco’s far-flung empire) and promised tangible improvements at the chain. In addition to ongoing efforts to sharpen Fresh & Easy’s merchandising and positioning in the marketplace, now comes word that the retailer will test smaller-format outlets — 3,000 square feet, less than half the size of its 10,000-square-foot prototype — to allow it to capitalize on a broader range of real estate opportunities.

Despite those refinements and the positive signs cited by Clarke, the clock is ticking. Tesco won’t fund a chain losing hundreds of millions of pounds a year forever, particularly when such a sizable investment might well produce better returns in markets where Tesco has established more traction. It’s incumbent on Fresh & Easy to prove that it has what it takes to succeed in the world’s most competitive retail market.